How to calculate depreciation on residential rental property

2 Replies

Hi Bigger Pockets,

This is my first time posting on the forum.  I plan on purchasing my first rental property this year!  I plan on going the turnkey route of purchasing out of state property.

I had a question on calculating depreciation on a residential rental property.  I've heard that I can depreciate the building portion of the property for 27.5 years.  Do I rely on the county assessor to help determine the value to depreciate or do I calculate it myself?  If it is based on the purchase price, what goes into the purchase price?  Does that include closing costs and home inspection costs? 

Thanks and much appreciated!

Yes, you can depreciate your basis on the property (excluding the value of the land).  For the turnkey property, the basis that you are going to depreciate will most likely be the total costs of acquiring the property that may include appraisal fees (initiated BY YOU), title insurance, survey costs, legal fees, inspection cost, and similar closing costs. These are added to the purchase price of the home to determine its tax basis.

These are not added to the basis

a) Fire insurance premiums

b) charges connected to getting a loan:

1) Points (discount points, loan origination fees) - This is deducted over the term of the loan.

2) Mortgage insurance premiums,

3) Loan assumption fees,

4) Cost of a credit report, and

5) Fees for an appraisal required by lender.

People generally use the county assessor's value to figure out the value of the land that is not depreciable. Any reasonable method is ok. 

If you happen to do any minor repairs before placing the property in service ( making it available for rent), those cost will also be added to the basis. But that would not be most advantageous to you. Wait until you make the house available for rent via advertisement, and then make the repairs if needed, so that the repairs dont have to be depreciated over 27.5 years and can be deducted right away against you rental income. 

Thank you so much for the info Ashish!

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